NatWest confirms in talks to takeover L&G

CBS.MarketWatch.com

LONDON (CBS.MW) -- National Westminster Bank PLC is set to announce terms and management Monday in its takeover of Legal & General Group PLC, the British life insurance company, according to a published report.

National Westminster
NW, +0.00%
the U.K.'s third-largest bank, confirmed on Friday that it's in talks with Legal & General. A spokesman from NatWest suggested on Friday that a further announcement could come as soon as next week, but stressed that "there's no deal yet."

NatWest is considering paying up to 10.8 billion pounds, or $17.4 billion, and will likely name three executives to run the combined company, Bloomberg reported Sunday citing a persons familiar with the talks. Legal & General chief executive David Prosser will likely joing NatWest's board and will run the company with NatWest Chairman David Rowland and CEO Derek Wanless, according to the report.

A one-year chart for U.S.-listed shares of NatWest.

Speculation of such a deal, which would create a powerhouse in the U.K. financial services sector, was being circulated in markets on Thursday. Shares in Legal & General rose 10 percent on Thursday, and on Friday gained a further 10.25 pence, or 5.3 percent, to 202.50.

However, markets have punished NatWest shares on the view that the price tag for such a deal is seen on the pricey side. NatWest shares quickly lost ground once U.K. markets opened and were last down 52 pence, or 4.3 percent, to 1,159 in London.

The deal's likely value is well more than the 7 billion pounds Lloyds TSB Group PLC paid for mutual life assurance group, Scottish Widows in July.

Bill Howard, retail banking analyst with Fox Pitt-Kelton stockbrokers, said the markets are suggesting a price tag of 210 pence per Legal & General share, which would be a nine percent premium to the insurance's group's closing share price on Thursday of 192 1/4.

"The market is going to try and move things up to make (NatWest) pay," said Howard. He said the price tag is a "generous valuation" for Legal & General shares, and his firm is downgrading those shares from attractive to hold.

Keeping up

NatWest's exposure to the life and pensions market is limited to NatWest Life, and analysts said the bank was keen to expand its hold in the market. Once Lloyds' bought of Scottish Widows, the pressure was on.

Legal & General has a reputation as one of the cheapest producers of pension and life assurance products, but a limited distribution market.

It also has a low cost fund that tracks stock market products, which has been popular with savers, which would complement NatWest's Gartmore fund management arm, which analysts say hasn't been viewed as overwhelmingly successful.

"Ultimately it means NatWest, like everyone else, seems to want to get a greater share of the savings market now that deposits have declined as a savings vehicle," said Howard. "You're looking at a situation where buying Legal & General gives NatWest a higher profile in the retail financial fund management area."

The Financial Times said Legal & General's chief executive, David Prosser, would join the NatWest board to run the retail banking and life insurance business. Nat West's chairman, Sir David Rowland, and its chief executive, Derek Wanless, would retain their current positions.

Paying the price

Howard said the merging the NatWest and Legal & General's life businesses and investment management arms, would create cost savings of 70 million pounds. "Taking these, but not revenue savings, into account, the deal looks to be earnings neutral."

"However, this deal would not solve NatWest's real strategic problem of needing to find a sizeable banking partner which will ensure substantial and ongoing synergies to boost its below average return on equity," he said. "In itself, the deal will destroy value, while adding little to earnings and we expect that (NatWest's) share price will weaken further."

News of a possible deal between NatWest and Legal and General has boosted other insurance providers, such as Norwich Union PLC. Shares in Norwich Union were up 47.75 pence, or 11 percent, to 475.25.

Jenny Campbell, insurance analyst with Greig Middleton stockbrokers said further deals are on the way. "It's part of the general consolidation going on worldwide. It's all about widening customer base and distribution. Legal & General have long been mooted as a take-over candidate."

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